Mike Scott analyses the latest ESG news, from the CA100+’s first net-zero company benchmark to the debate over the EU sustainable finance taxonomy
More than a fifth of the world’s 2,000 largest public companies have set net-zero targets, the Energy & Climate Intelligence Unit reports. The extent to which they have grasped what this will involve is another question.
As the net-zero agenda gathers pace, what it takes to reach that goal is slowly dawning on investors, bankers, companies and governments. It is also becoming harder for them to avoid acting, as investors and other stakeholders hold them to account for the inconsistencies between their goals and their actions.
The new Net-Zero Company Benchmark from $54tn investor coalition Climate Action 100+ shows that many of the world’s biggest emitters have made commitments, but are performing poorly against them, with many failing to set interim targets on the road to 2050 or cover the full extent of their emissions. (See Biggest emitters ‘dangerously off track’ in race to tackle emissions)
Banks in the spotlight
It is not just large emitters that are struggling to reconcile their climate commitments with their business model. Rainforest Action Network’s Banking on Climate Chaos 2021 report reveals that in the five years since the Paris Agreement, 60 of the world’s largest banks have pumped more than $3.8tn into the fossil fuel industry, with funding higher in 2020 than in 2016.
The report names the largest funders of fossil fuels around the world, with JPMorgan Chase the worst overall, RBC the biggest funder in Canada, Barclays in the UK, BNP Paribas in the EU, MUFG in Japan and Bank of China in China. Yet JPMorgan, the world’s largest bank, is also the leading arranger of green bond issuance and has announced a commitment for its financed emissions to be Paris-aligned.
The banks can also point to the fact that spending on fossil fuels fell 9% to $750bn in 2020, though that was hugely affected by the Covid-19 pandemic and the consequent fall in oil prices. The key test of banks’ climate commitments will be if funding continues to fall next year.
The role of banks in financing the climate crisis was highlighted in another report, from DeSmog, which found that almost 80% of directors of the UK’s big five banks have connections to polluting industries. “These individuals have spent their careers immersed in the norms and ideology of those high-carbon industries,” said Rachel Sherrington, DeSmog’s lead researcher for the project. “There is a concern that such experience makes them ideologically favourable to the organisations responsible for driving the climate crisis.”
At some point, banks will have to get to grips with these inconsistencies, because their stakeholders are starting to notice and demand action. Standard Chartered, for example, finds itself in the spotlight after Fridays for Future activists demanded that it stop funding coal projects.
On the other side of the coin, the positive announcements continue to flow freely, too. The Net Zero Asset Managers Initiative announced another 43 asset managers had joined its ranks since its launch in December, including BlackRock and Vanguard. The 73 signatories, which represent 36% of total assets under management globally, commit to work with clients to achieve 2030 emissions reduction targets and reach net zero by 2050.
In the UK, Aviva has announced plans to be net-zero by 2040, “the most demanding target for any major insurance company in the world”, it says, while Spain’s BBVA has said that it will stop financing coal-related activities by 2030 in developed countries, and by 2040 elsewhere.
And as commercial banks and investors grapple with the challenges of net-zero, central banks and supervisors are going to have to do the same, says the Grantham Research Institute. “As guardians of the financial system, central banks and supervisors also need to introduce explicit strategies to support the transition to net-zero,” it says. “The first signs of financial authorities starting to align their operations with net-zero are beginning to emerge; a systematic approach is now required.”
Fitch Ratings says that “banks and insurers around the world are likely to face climate-related stress tests in the next two to three years as supervisors become increasingly aware of the urgency in gauging the risks from climate change”.
Already, the European Central Bank has identified “a major source of systemic risk” in the preliminary results of its economic stress test to gauge the impact of climate change on 4m companies and 2,000 banks over 30 years. In a recent blog post, Luis de Guindos, vice-president of the ECB, said that “in the absence of further climate policies, the costs to companies arising from extreme weather events rise substantially, and greatly increase their probability of default”.
The ECB has indicated its readiness to force banks with serious climate risks to hold more capital, and a host of European rules are set to hit the finance sector this year.
Meanwhile, the Sustainable Finance Disclosure Regulation (SFDR) aims to direct €1tn into green investments over the next 10 years as well as improve the disclosure of climate-related data. It will be helped in this aim by the EU’s green taxonomy, which will define exactly what constitutes a sustainable investment when it is published by the Commission next month. However, EU members and the European Parliament, who have the power to reject the draft legislation, are still wrangling over certain aspects of this, particularly whether natural gas and nuclear power should be excluded.
The former Bank of England governor, Mark Carney, weighed into the debate last week, telling the FT Weekend festival that the EU should embrace a “50 shades of green” approach rather than make the taxonomy unworkable for companies by adopting too rigid a definition.
Along with increased pressure to assess the business impact of climate change, there is a growing number of analytical tools. The Prince of Wales’s Accounting for Sustainability initiative has published the A4S Essential Guide to Valuations and Climate Change, risks and opportunities, while RBC has become the 100th member of the Partnership for Carbon Accounting Financials (PCAF), which aims to develop a standard for measuring and disclosing financed emissions.
The UK government is investing £10m in a new UK Centre for Greening Finance and Investment which will help to commercialise products such as tools that measure storm and flood risks for properties and data that tracks companies’ pollution.
And Sugi, a London-based “greentech” company, has created a tool using S&P Trucost data that it says allows retail investors to “measure their portfolio temperature” – ie whether the underlying companies in a portfolio are aligned with the Paris Agreement's 2C target.
BlackRock revealed plans this month to vote against directors at companies that fail to effectively disclose and manage natural capital risks such as deforestation, biodiversity loss and freshwater and ocean pollution.
The move is part of a growing trend for investors to tackle business impacts on the natural world. The Church Commissioners for England, which manages assets worth £8.7bn, became the first investor to join the Science Based Targets Network Corporate Engagement programme to develop a framework that will help businesses tackle nature loss in line with science.
Rathbone Greenbank Investments is the latest company to join the Partnership for Biodiversity Accounting Financials (PBAF), which aims to create a common approach to assessing and measuring the financial sector’s impact on biodiversity.
The benefits of engaging with companies continue to become more evident, with Tesco committing that 65% of its sales will come from healthier products by 2025, in response to a shareholder resolution co-ordinated by ShareAction.
The Australasian Centre for Corporate Responsibility (ACCR) has also recorded some notable successes in recent weeks, pushing Rio Tinto to improve its annual review of industry associations and suspend membership of those that lobby against climate action, the first time an Australian company has supported a shareholder resolution.
The group also welcomed a commitment from Woodside Petroleum to adopt the Say on Climate initiative and provide shareholders with a non-binding vote on the company’s climate change report at next year’s AGM.
Dan Gocher, director of climate and environment for ACCR, said investors would be demanding that Woodside set targets for cutting its scope 3 emissions, the CO2 impact of the products it sells, in line with European producers like Shell, Total and BP.
“Due to the rapid transition taking place in the energy sector, it is imperative that shareholders are provided with the information required to assess the future earnings and value of these companies.”
‘Green is good’ evidence multiplies
The market for ESG-oriented funds goes from strength to strength, with Fitch Ratings estimating that assets under management in ESG money market funds grew by around 50% in 2020 to €123bn and Bloomberg reporting that the $89bn net inflows to ESG exchange-traded funds (ETFs) in 2020 was almost 10 times the 2018 figure and almost triple 2019 figures.
Pension funds in the UK, the U.S. and Scandinavia, with £870bn of assets, have committed to make their portfolios net-zero by 2050 or earlier. As well as the climate imperative, this is growing evidence that ESG and climate-focused funds outperform their peers. The seventh Carbon Clean 200 index from As You Sow and Corporate Knights reveals that the Clean200 outperformed its MSCI ACWI (All-Country World Index) peers by 47% over the year to January 31, 2021, and by 34.74% since the Clean200 was launched in July of 2016.
This is backed up by Morgan Stanley’s 2020 Sustainable Reality report, which found that in 2020, U.S. sustainable equity funds outperformed their traditional peers by a median total return of 4.3% and suffered less volatility. Audrey Choi, Morgan Stanley’s chief sustainability officer, said: “Sustainable funds’ strong risk and return performance during an exceptionally turbulent year further erodes the persistent misconception that sustainable investing requires a performance sacrifice.”
At a macro level, a new IMF report shows that investing in renewable energy and biodiversity conservation do more to boost a country’s GDP than investing in fossil fuels or activities that destroy ecosystems. Specifically, the report finds that spending on clean energy, like solar and wind, and nature conservation has an impact on GDP that is about two to seven times stronger – depending on the technology and the horizon under consideration – than spending on fossil fuels and unsustainable land use like industrial agriculture.
And BNP Paribas Asset Management, which has just launched an Inclusive Growth fund that aims to generate returns through investment in companies with a proactive approach to reducing inequalities in income, education, gender, ethnicity, geographic origin, age or disability, has also unveiled research showing that inclusive companies generate better financial performance.
Other innovative offerings include the first green bond just for retail investors, from Abundance and Northern Gas Networks, whose proceeds will help to upgrade the UK gas distribution network to make it hydrogen-ready. In another first, the Danish Red Cross is issuing the first catastrophe bond for volcanic disasters, to raise $3m in advance of an eruption at one of 10 volcanoes around the world.
This article appeared in the March 2021 issue of The Sustainable Review: See also:
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Policy Watch: Substance on climate action in short supply despite entreaties of UN Secretary-General
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Biggest emitters ‘dangerously off track’ in race to tackle emissions
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